Expansionary fiscal policy in the face of an oil shock will stabilize _____, but at the cost of ____.

Question

Quizplus · Accepted Answer

Expansionary fiscal policy, such as increasing government spending or cutting taxes, aims to boost economic activity. In the face of an oil shock, which typically raises prices and slows economic growth, such a policy can help stabilize real GDP by stimulating demand. However, by increasing demand in an already inflationary environment, it can lead to higher price levels, exacerbating inflation.

Expansionary Fiscal Policy in the Face of an Oil Shock